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Callable step-up note 3.50%
Old 11-07-2018, 08:42 AM   #1
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Callable step-up note 3.50%

I received an email from my brokerage today that said they're participating in a callable step-up note offering. Here are the details:

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Ratings: Aa3/A
Coupon: 3.50% to 11/30/2020; 4.50% to 11/30/2022; 5.00% to 11/30/2023
Maturity: 11/30/2023
Payment Frequency: Semi-Annual
Call Status: Callable 11/30/2019 @100, Semi-Annually-thereafter
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I've read up on the basics of callable step-ups, so I get the general idea. My question is, does this seem like a good place to park some idle cash that otherwise would be sitting in a money-market savings account earning 1.90%? I have no immediate or short-term need for the cash in question, so it would be fine with me if the note wasn't called early and I ended up earning 3.50 - 5.00% over the 5 years till maturity. Any downsides to this that I'm not seeing?
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Old 11-07-2018, 08:49 AM   #2
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The APY would be ~4.5% if held to maturity. Risk is that rates go down, bond gets called and you have to reinvest proceeds at lower rate.
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Old 11-07-2018, 09:09 AM   #3
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I periodically buy step CDs. My view is that at the time of the offering, the yields are better than current yields for equivalent maturity at the steps. So, in the worst case that they are called, up until that point you've received better yield than had you bought without the step/call feature.

Assuming I were comfortable with the issuer, I'd buy some of these notes.

Do you have the CUSIP for these notes?
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Old 11-07-2018, 12:59 PM   #4
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Complicated products offered to ordinary retail investors are automatically suspect. If it is a good deal, why have their heavy-hitter and institutional customers not bought all of the offering? This is a general question, not picking on this deal particularly. It should be asked every time IMO.



"Details" should include the issuer name.
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Old 11-07-2018, 01:46 PM   #5
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Originally Posted by OldShooter View Post
Complicated products offered to ordinary retail investors are automatically suspect. If it is a good deal, why have their heavy-hitter and institutional customers not bought all of the offering? This is a general question, not picking on this deal particularly. It should be asked every time IMO.



"Details" should include the issuer name.
I've bought callable step-up CDs before. While I might have gone into it thinking that the issue was sure to be called before the rate stepped up, it wasn't always so. I don't recall seeing callable corporate bonds, if that's what this issue is. Agree that the issuer name should be given for the best advice.
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Old 11-07-2018, 01:54 PM   #6
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The short end of that offering is nothing special. The mid point is somewhat interesting and the long end is a deal compared to bonds available today at that quality level. So its just of matter of will it be called. Worst case you don't get much return, but you don't lose anything. Best case you have a nice shorter term bond. Something tells me though that it won't last past '22.
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Old 11-07-2018, 01:59 PM   #7
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Originally Posted by njhowie View Post
I periodically buy step CDs. My view is that at the time of the offering, the yields are better than current yields for equivalent maturity at the steps. So, in the worst case that they are called, up until that point you've received better yield than had you bought without the step/call feature.

Assuming I were comfortable with the issuer, I'd buy some of these notes.

Do you have the CUSIP for these notes?
@njhowie - as you are one of the rate kings here, I was wondering about your statement above in that is there a another valid comparison in locking up the monies for a longer non callable period (5 yrs) vs. callable at 3yrs plus reinvestment for a new 2 year period in a declining interest rate environment.
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Old 11-07-2018, 02:09 PM   #8
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Originally Posted by njhowie View Post
My view is that at the time of the offering, the yields are better than current yields for equivalent maturity at the steps. So, in the worst case that they are called, up until that point you've received better yield than had you bought without the step/call feature.
This is basically how I'm thinking about it, too. Seems like it's essentially a "no lose" proposition, given that the cash I'd be investing is currently sitting in a 1.9% APR money market account.

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Do you have the CUSIP for these notes?
Yes, the CUSIP is 89114QER5, and the issuer is The Toronto-Dominion Bank.
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Old 11-07-2018, 02:41 PM   #9
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Its a foreign bond. So there's that.
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Old 11-07-2018, 02:52 PM   #10
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@njhowie - as you are one of the rate kings here, I was wondering about your statement above in that is there a another valid comparison in locking up the monies for a longer non callable period (5 yrs) vs. callable at 3yrs plus reinvestment for a new 2 year period in a declining interest rate environment.
That's certainly a valid comparison.

Additionally, what your objective is will also come in to play. If you want the guarantee of that long-term income stream without the possibility of the issuer pulling them out from under you, then you may be very happy taking a non-callable for slightly lower yield.

If I'm simply looking for some place to put money for up to 5 years and I'm looking to put the money in to something now, my feelings are similar to Sojourner - let the issuer do what he wants ... call them a year from now, two years from now, or whenever - I'm happy with the rates at each step in comparison to what other similar instruments are offering today.
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